The risk of deflation in the UK grew today after a key measure of inflation slumped to 0% for the first time in half a century.
According to the Bank of England, the Retail Price Index (RPI), which includes housing costs, fell from 0.1% in January to 0% last month, the first time the measure had hit zero in 49 years.
Deflation occurs when the annual inflation rate falls below 0% and the RPI, as recently as July last year, stood at 5%.
However, any imminent deflation risk has been put on hold after the Bank also confirmed the Consumer Price Index (CPI), which excludes mortgages, had risen from 3% to 3.2%, a widely unexpected move.
Because CPI is more than 1% above the Government's 2% target, the Bank's Governor, Mervyn King, has written to Chancellor Alistair Darling to explain the rise. In his letter, King says the CPI rise had been higher than expected.
"Despite the increase in CPI inflation in February, we believe that the sharp decline in CPI inflation since its peak in September is likely to resume in the coming months," he says.
"It is likely that over the next year CPI inflation will move below target, although the profile of inflation could be volatile, reflecting the reversal of the temporary change in VAT on CPI inflation."
The Bank of England uses the CPI to set interest rates.IFAonline
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